Are You a Risk Taker? Risk Tolerance and Finances

One of the best things about personal finance is that it's so personal. Everyone has their own strategy, tailored to their own specific personality. I think this is why there can be so many personal finance blogs out there, yet somehow we all still manage to come up with unique and interesting content day in and day out.

If you're anything like me, it's the personal stories that keep me coming back, not the generic posts about maintaining a reasonably sized emergency fund.

One of the things I love reading about is risk tolerance. It's so interesting how this personal threshold is so different for each individual. Myself, I'm not a risk taker. Instead of investing my income, I'm choosing to take a guaranteed but modest 5.5% return by paying off my student loans. After that, I'll be paying off my low-interest car loan, and beefing up my emergency fund until it reaches 3-6 months of expenses, and saving for a 20% house down payment.

I don't like being in debt, and I'd rather spend my money limiting my vulnerability than investing for a much higher potential return. Heck, even the idea of buying a house, and tied to such a huge mountain of debt, makes me squirm, even though it would be an asset.

I'm one end of the spectrum. At the other end, you'll find people who are much more daring than me, and who, as a result will probably end up a lot more wealthy than me. These people are comfortable with maintaining debt in favour of investing their cash flow for higher returns. These people carry multiple mortgages for rental income, and are willing to take risks with their capital for the possibility of higher returns. Lots of these people are entrepreneurs, which in my opinion, is one of the biggest risks a person can take.

Determining Your Risk Tolerance

Neither end of this spectrum is necessarily the best place to be, and there is a ton of grey space in between. Knowing where you fall on the risk tolerance scale is important, and can influence your financial habits in a huge way. From the size of your mortgage to the expected rate of return on your retirement savings, determining your risk tolerance level when it comes to your finances should govern almost every financial choice you make.

I won't go into how to figure out what your risk tolerance level is, a quick google search yields a bunch of great articles and quizzes on figuring that out. I will say that it's important to take your risk tolerance into consideration when making financial choices.

One Person's Risk is Another Person's Reward

Imagine if I suddenly decided that I was going to follow a formula for how to make my financial decisions, without giving any thought to my personal preferences for risk. According to conventional wisdom, I might still pay off my student loans, but I might not bother to pay down my car loan or buy insurance and instead start saving more aggressively retirement. I might also put down 5-10% on a house instead of 20% in order to take advantage of historically low-interest rates.

While this might sound like a perfectly reasonable plan for someone in the middle of the risk tolerance spectrum and positively boring to the world's risk takers, to me, this plan is a recipe for sleepless nights and worry. By not factoring in my risk tolerance, I'd be setting myself up for failure from the start.

Heed Your Personal Risk Tolerance

Personal finance is personal. This has got to be one of the favourite sayings in the personal finance community, usually to justify a bad purchase of some kind. In this case, however, it's true.

Know your risk tolerance level, own it, don't feel guilty about it if you're like me and hate risk, and DEFINITELY don't ignore your risk tolerance level when it comes to making financial decisions!

Are you a risk taker? How does your risk tolerance level affect your finances?

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Comments

I am quite the risk taker. Being young, healthy and not afraid of having to bounce back, I'd rather go for the bigger risk in hope of greater rewards. I prefer to use available funds to invest rather than overpay a mortgage or even keep an emergency fund. Like you said it is all personal and you have to go with what you are comfortable with. Some people can't sleep if they don't have 12 months of living expenses on a 1% savings account, I can't sleep if I have too much cash that is bringing me nothing. My recent post What if money was no object?

I suppose it depends who you ask. I invest entirely in equities, so that probably makes me a risk taker. But I do my own stock research and try to buy under or fair valued companies with a history of dividend payouts. So maybe that makes me a more conservative investor. My recent post Should I buy a new car or keep the old one?

I'm the same way! I've been keeping a fairly small emergency fund, in favour of paying off my student loans, but I'd love to have a much bigger one and I know I'll be way more comfortable with my financial situation once my emergency fund is beefed up.

I would consider myself a risk taker, but they're generally educated risks. I invest mainly in stocks, which I know some would consider risky. However, it's done after thorough research and would not be done if I am not comfortable with it. In the end, I think it comes down to what allows you to sleep at night. If it's keeping you up then it's simply not worth it.

Great point about needing to understand your risk tolerance. Like you say, there's no one right answer and simply trying to follow someone else's rules is a recipe for failure.

For me, I'm conservative in that I want to have a strong base that will protect my in worst case scenarios. This means insurance and a large emergency fund. But once I have that stuff in place, it makes it easier to take risks in other places. My retirement savings are split 70-30 stocks-bonds, and I plan on keeping it that way all the way to and maybe even in retirement, simply keeping a few years cash reserves in addition. Some people would call that aggressive (others might call it conservative), but I think that when you've got the worst-case scenario stuff handled, you can take on some more risk in other places. My recent post Joining the Yakezie Challenge!

I completely agree! I plan on beefing up my emergency fund once I'm out of debt, and getting insurance when it makes sense (no house – no dependants right now). Once that's done, I think I'll feel much more confident putting the rest of my cash towards investing.

I have a very high risk tollerance for somethings and not so much for others. I would like to think I would have the guts like Pauline does and buy land in another country or a coconut farm (both sound awesome) but I can't pull the trigger. On the flipside I will invest heavily in the stock market and even loan money to someone to start a small business. I don't have much of a traditional emergency fund because I hate seeing my cash lose value to inflation.

But in the end, you are right people have to do what makes them feel comfortable and if that is a large emergency fund then so be it. If being 100% debt free (mortgage included) makes you happy do it!

It sounds like you are risk tolerant when it comes to things you understand and are comfortable with – but no so much with uncharted waters. That's a good thing! That'll prevent you from diving into something head first before you completely understand it!

You are right Jordann! Everyone has different viewpoints which makes this space way more interesting than Kiplinger's! I'm still not sure how much of a risk taker I am. I think I will always have a large cash savings. How large will depend on circumstances, but at least I know if anything tragic happens I will be covered. I do not like debt. I could tolerate mortgage debt for a while, but I'm not sure if I could a mortgage for 30 years. My recent post How’s Your Health and Fitness Plan Progressing?

I agree, I hate debt. I think that when I finally buy a house, I'll probably make extra payments to get rid of it quicker, instead of investing the difference. Do you think that someone's risk tolerance can change throughout their lifetime?

I'm not a risk taker at all when it comes to my money, but I'm a risk taker (or used to be more of) when I was younger and traveled and did things like bungee jumping an skydiving. Now I play it safe. I always admire people like Pauline who have the balls that I don't have when it comes to money. lol! My recent post Frugality: My New Normal

I'd like to think that I could be a risk taker if the situation arose, but I tend to be a bit more risk averse. I try to be conservative so that I can take advantage of a great opportunity when it arises which will force me to be more of a risk taker. In order to free up more capital in the long-term, we're currently trying to pay off all debt which is a more conservative approach. My recent post How much do pets really cost?

I'm not a risk-taker in general. However, given my investing time frame I like a risky portfolio for stock investing. I don't like leveraging debt for investing purposes, so I am anti-risk in that way. My recent post What I Learned from a Lost Purse

I have a typical under-40 investment distribution. There's a risk in not taking risk, too. But I am paying off my mortgage early. My recent post Use Grocery Circulars – Saving Money On Groceries, Part 4

Mr PoP and I tend to balance each other pretty well when it comes to risk. He's more drawn to high rewards, whereas I need to see the numbers behind everything before being okay with the level of risk/reward.

I'm a risk taker when it comes to experiences, but when it comes to finances I'm a bit more risk averse. Investing is still pretty daunting to me, but I think understanding it bit by bit helps with taking more risks. My recent post My favorite bachelorette party story

I'm pretty young and risk tolerant. I have no problem with high risk, high reward. On the other hand, we are trying to pay off the remaining student loan just to be out of debt. Debt sucks… My recent post Save Money With a Low Flow Showerhead

True, I guess the first few years of being an entrepreneur are very risky, once the business gets through the first few years, you are probably good to go. That said, if the business fails, you won't have a severance package or unemployment benefits to fall back on.

I have been getting more conservative over the years. When younger, yes – I was aggressive and risk-taking compared to now. At this point, with kids, I've gotten more conservative in many ways. But wiser in terms of which good risks to take, at least so I think 🙂 My recent post The Insecure Husband

I'm not very risk tolerant with individual stocks. I just watch them and want to do something, so they're no good for me. But I think that P2P lending and index funds fit my style better. Even if they're riskier than some investments, they just fit my profile better. My recent post We Don’t Have a Plan for Retirement…yet.

Mrs. Bonner and I are often at odds with each other regarding risk. I think we're fairly young, early 30's (is that still young???), and I'm more inclined to take the risky route whereas she likes having cash. A few years ago I finally convinced her to take our emergency fund that was sitting in a "high-yield" savings account earning a whopping 1.75%. We put it in a S&P500 index fund that has a ~0.5% quarterly dividend and is up >60% since we bought it. My compromise was keeping a floor in our savings account of a few month's worth of cash, which is reasonable. My recent post The rich got richer and so can the rest of us

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Hello and welcome!My name is Michelle and I'm the author/owner of Making Sense of Cents. Learning how to save money and make more money changed my life. It allowed me to pay off $40,000 in student loans, start my own business, and I now travel full-time.